Asia's major currencies, including the Korean won, the Japanese yen, and even the Indonesian rupiah, are weakening in unison. The Wall Street Journal (WSJ) recently analyzed the weakness of Asian currencies and said three factors are working in combination: a surge in energy prices, rising U.S. interest rates, and the artificial intelligence (AI) boom.
The Japanese government has poured more than $70 billion this year to defend the yen, and the Bank of Indonesia took out an emergency rate hike. Korea is also stepping up foreign-exchange market monitoring, but the won has fallen more than 5% against the dollar this year. A weak currency is favorable for export corporations but pushes up import prices and burdens consumers. The issue is especially sensitive for Asian countries with high dependence on energy imports.
WSJ pointed to rising energy prices as the most direct cause. Korea and Japan rely on imports for most of their energy consumption. After the United States and Israel attacked Iran, the continued crisis over a blockade in the Strait of Hormuz pushed up international crude oil and natural gas prices and increased Asian countries' energy import burdens. Because most crude oil transactions are conducted in dollars, higher energy import expenses translate into greater dollar demand and weaker currency values, it said.
But some analyses say energy prices alone cannot explain recent exchange-rate moves. Paul K.B., head of East Asia Econ, a specialist East Asia economic analysis firm, told WSJ, "Asian currencies were already weakening even before the Strait of Hormuz blockade."
WSJ cited the U.S. economy as another cause. As the U.S. economy has grown more solidly than expected, U.S. Government Bonds yields have risen, and investors are flocking to U.S. assets in search of higher returns. It said the widening interest-rate gap between the United States and Asian countries is fueling a stronger dollar and weaker Asian currencies.
WSJ paid particular attention to the impact of AI on exchange rates. Korea, Taiwan, and Japan are cited as major beneficiaries of the AI boom. Exports of memory semiconductors, optical cables, and advanced materials have surged, bringing an export boom. Typically, when exports increase, foreign currency flows in and currency values rise.
This time, however, the opposite is happening. WSJ pointed to capital flows heading to the United States as the reason. Because the center of the AI investment boom is in the United States, investors in Korea, Japan, and Taiwan are actively buying U.S. tech stocks, including Nvidia, and foreign investors are also moving funds to the U.S. market after taking revenue in Asian stock markets. Dollars earned from exports are flowing back into the United States, offsetting the currency-strengthening effect, it said.
Korea is a prime example. Despite an export boom driven by surging demand for AI chips, the won has fallen more than 5% against the dollar this year. WSJ called this a rare case of "currency weakness amid an export boom." Frederic Neumann, HSBC's chief Asia economist, told WSJ, "I have hardly ever seen this in my career as an economist."
Experts say Asian currency weakness is likely to continue for the time being. That is because energy risks from the Middle East persist and expectations for U.S. rate cuts are fading. Some also say that while trade moved exchange rates in the past, we are now in an era where global capital flows driven by AI determine exchange rates.